What Retailers’ E-Commerce Strategies Reveal About the Future of the Big-Box Last-Mile Delivery Market
E-commerce retail disruption seems to come in waves. In the last decade, we’ve seen the transformation of the retail industry for books, electronics, apparel, music, tickets, and travel.
E-commerce disrupts more than just retail, though. It’s a logistics story, too. Savvy third-party logistics providers (3PLs) are eyeing the horizon, poised to catch the next wave. It’s one with enormous implications for 3PLs: furniture, appliances, and equipment.
Growth in this category has been recent and sudden. Until the end of 2015, category growth was in line with overall e-commerce retail. In the fourth quarter of 2015, however, e-commerce sales of these bulky goods peeled away. Growth reached a peak in late 2017, when the “furniture, appliances, and equipment” category grew 32% over the prior year, according to media measurement and analytics firm comScore.
What caused this sudden acceleration in online sales? Heavy-goods retailers began investing in e-commerce growth strategies, despite the inherent challenge of delivering a couch, dishwasher, or building materials to a consumer’s doorstep. Between the genesis of pure-play e-commerce furniture retailers, augmented reality apps that allow customers to visualize 3D-rendered furniture or appliances in their homes, visual searching, or transitioning the learnings of the catalogue business to e-commerce, retailers are winning over consumers in this historically brick-and-mortar category.
But once those customers are converted, retailers have only won half the battle. A successful heavy-goods e-commerce program is wholly dependent on successful logistics execution.
Forward-thinking 3PLs are paying close attention to furniture, appliance, and equipment retailers’ strategies. 3PLs should assess the needs of both retailers and consumers in this “new normal,” and develop services accordingly. In a business with thin operating margins, 3PLs must form mutually beneficial customer partnerships and price strategically. They must perceive retailers as both customers and as looming competition. Finally, 3PLs should be poised to act now, while logistics networks and strategies for big-box last-mile delivery are being established. 3PLs can’t afford to arrive late to the e-commerce party.
Below, we’ll assess the e-commerce strategies of leading retailers—-Home Depot, IKEA, Williams-Sonoma, Wayfair, and Amazon—-and identify how 3PLs can carve out a competitive advantage.
Retailer strategy: Retailers are focusing on core competencies to weather the retail climate.
3PL solution: 3PLs can provide a full, end-to-end suite of services through organic growth, acquisitions, and partnerships.
In the current retail climate, retailers often want to focus on core competencies. Retailers look to 3PLs for first-to-final-mile solutions, complete with a selection of white-glove service tiers and—due to e-commerce’s sky-high return rates—reverse logistics solutions. Logistics providers have certainly taken note. In the last few years, six of the top 15 for-hire carriers (by revenue) have offered new or dramatically expanded last-mile services. Others, such as UPS, are said to be eyeing big-box last-mile delivery partnerships or acquisitions.
Last-mile fits neatly into 3PLs’ service portfolios, with the opportunity to cross-sell services and grow or diversify customer bases. Most major big-box last-mile carriers have already seen significant growth, and many are anticipating revenue growth in the low- to mid-teens. XPO Logistics, for example, grew its last mile segment 16.6% in 2017, including fourth quarter growth of 21.3%.
Retailer strategy: Retailers are emphasizing services to differentiate in an omnichannel environment.
3PL solution: 3PLs should seize on the trend of in-home furniture assembly and appliance installation by offering new value-added services.
As brick-and-mortar sales fall, retailers are redefining the shopping experience. In an omnichannel environment, the scope of the retail experience now extends far beyond a physical store location. Retailers are making big service plays, many of which tie directly to logistics. Research shows that consumers are increasingly interested in in-home furniture assembly and appliance installation. Electronics retailer Best Buy offers services such as TV & home theater, car electronics, and appliance installation. Amazon offers similar services through Amazon Home Services, including Smart Home device installation. Furniture retailer IKEA acquired the online marketplace Task Rabbit in 2018. Task Rabbit connects freelance labor with customers in need of task completion, including furniture assembly.
Leading 3PLs already offer tiered service levels, but the increasing demand for in-home services offers additional opportunities. That could take the form of additional white-glove service tiers, partnerships with existing service providers in the vein of Task Rabbit, and the cultivation of service technician relationships.
Retailer strategy: Retailers rely on repeat customers to drive revenue.
3PL solution: 3PLs must measure and manage the customer experience.
A positive customer experience is essential in securing repeat customers.
Repeat customers generate big business. At e-commerce furniture retailer Wayfair, for example, two-thirds of orders derive from repeat customers. Last-mile delivery providers act as the face of the retailer in the consumer’s home.
3PLs should rigorously measure, monitor, and act on customer service ratings. Driver compensation can be tied to ratings. At the same time, drivers are in high demand: drivers can afford to be selective about their employers. 3PLs must invest in recruitment and training to attract a best-in-class workforce.
3PLs should also offer customer-facing solutions, such as shipment visibility technology and flexible delivery window scheduling. When consumers can manage scheduling, 3PLs see an additional benefit: the chance of a costly and time-consuming missed delivery is decreased.
Retailer strategy: Retailers drive profitability with omnichannel business.
3PL Solution: 3PLs should pursue strategic customer partnerships and price in accordance with demand.
E-commerce can be great news for retailers’ bottom lines. Home furnishings retailer Williams-Sonoma describes e-commerce as a “key profitability driver,” with an operating margin in excess of 20%. Additionally, the omnichannel customer is one retailers want to attract: at Williams-Sonoma, multi-channel customers generate five times the revenue of single-channel customers.
It’s a different story for 3PLs. Big-box last-mile delivery is time- and labor-intensive, and requires significant equipment and facility investment. The operational costs and complexities are so high, in fact, that some carriers opt out entirely.
That makes those that do offer high-quality last-mile services a major asset to retailers. 3PLs are in a position to be selective about customers, and should seek strategic customer partnerships. Ideal partnerships will be those offering ample volumes, significant density, profitable business, and well-functioning business relationships.
The operational costs of running a last-mile business are increasing. 3PLs must cover costs and price services in accordance with market demand. More than a few 3PLs have severed unprofitable partnerships to preserve the bottom line.
Retailer strategy: Some retailers are finding that their logistics networks can be a successful service and revenue stream for vendors and manufacturers.
3PL solution: Out-perform retailers’ logistics services.
Despite the recent success of omnichannel retail, furniture and appliance brands have a problem: the so-called “retail apocalypse.” Department stores, which are significant retailers of furniture and appliances, have been shuttering their doors. Sears, a major seller of appliances, has been closing hundreds of stores per year. Macy’s, which carries furniture, has decreased its store count by about 25% since 2014. Recently, furniture maker and retailer Heritage Home filed for bankruptcy, while Reuters reports Mattress Firm is considering a bankruptcy filing. And in a fragmented furniture market, small furniture stores are closing without much media fanfare.
The upshot? Big brands, suddenly short on shelf and floor space, are increasingly opting for online marketplaces to stay afloat. Sears’ tires and Kenmore brand appliances are now sold through Amazon (complete with Prime two-day delivery), and General Electric Company sells large appliances through Wayfair.
The shift to marketplace sales presents an opportunity and a threat to 3PLs. 3PLs have the expertise, and networks to fulfill and deliver the volumes now moving through marketplaces. At the same time, omnichannel retailers have invested billions of dollars in e-commerce logistics and developed millions of square feet of e-commerce fulfillment space. Now, they’re identifying these hard-won logistics networks as an asset and potential revenue stream.
Amazon, for example, now acts as a 3PL for half the third-party seller units sold on its marketplace, and recently announced an initiative to build out hundreds of local delivery networks. At Wayfair, the company’s highest-ranked strategic priority is scaling its logistics capabilities. The retailer’s 3PL subsidiary, CastleGate, along with its Wayfair Delivery Network, provides 3PL services for suppliers. The majority of last-mile delivery goes through its own last-mile facilities.
Retailers are presenting new value propositions for brands, and 3PLs should take note. Previously, when manufacturers partnered with retailers, they were leveraging shelf space. Now they’re leveraging online merchandising and logistics networks. 3PLs can prove their mettle or watch business flow to retailers-turned-logistics-providers.